Enron Report - Tax Schemes Even the IRS Doesn't Understand

Last Thursday, the U.S. Senate's Joint Committee on Taxation published a three-volume, 2,700 page report describing what the committee had learned of the tax shelters used by Enron Corporation to reduce and in some cases avoid paying U.S. corporate income tax.

The year-long investigation into Enron's shenanigans produced a high level of awe from Senators who knew big corporations use tax shelters to lower their tax bills but didn't know quite how much of an industry the practice is. "Instead of drilling for oil and gas, Enron was drilling the tax code, looking for ways to find more and more tax shelters," said Senator John B. Breaux (D-LA).

Senator Charles Grassley (R-IA), chairman of the committee, was struck by what he called "unbridled greed and blatant disregard for the law of fairness." At issue may not be the legality of the tax avoidance schemes Enron used as much as the fact that observers feel a lack of ethics was behind the actions. "What hit me the most was the moral fiber of the people involved," Senator Grassley said.

Robert Hermann, Enron's former lead tax counsel, responds to the claims of outrage by standing behind the legality of the transactions that were used. He has worked with investigators in attempt to help them understand what transpired. In one deal, reported last summer in The Washington Post, Enron increased its reported profit by $225 million by lending itself money to boost its investment in its headquarters building and then claiming a huge depreciation deduction. Investors reading Enron's financial statements could not detect that this one-time windfall had not come from its business operations. ["Concerns Grow Amid Conflicts," The Washington Post, July 30, 2002]

Like many others at Enron, Mr. Hermann realized things were getting out of hand and claims he tried, unsuccessfully, to get an audience with Kenneth Lay, Enron's CEO, to explain the matter. Prior to the company's bankruptcy filing late in 2001, many of Enron's business divisions were falling short of earnings targets, and the tax department was asked to help pick up the slack by engineering tax-saving strategies that could enhance the company's bottom line.

Those strategies amounted to revenue distortion on Enron's financial statements of nearly $2 billion while the company was saving the same amount in federal income taxes. Tax shelters used by Enron were designed by leading Wall Street firms including Bankers Trust (now Deutsche Bank), Chase Manhattan (now part of J.P. Morgan Chase & Co., Inc.), and signed off on by accountants at Arthur Andersen and Deloitte & Touche and lawyers at Vinson & Elkins, Shearman & Sterling, King & Spalding, and Akin Gump Strauss Hauer & Feld.

Enron paid millions of dollars for opinion letters prepared by the lawyers and accountants, attesting to the legality and legitimacy of the shelters. Before going under, Enron created 881 offshore subsidiaries as part of its strategy to shelter tax dollars.

Enron is not alone in its deception. Documents found at Enron show that other companies, including General Electric, Microsoft, American International Group, Merck, and others were using the same types of shelters.

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